Monday, April 01, 2013

Eurocrash: a sense of realism?

"How could sophisticated European finance ministers — along with senior officials of the European Central Bank and the International Monetary Fund — have signed off on such a counterproductive rescue plan?"

This is what the New York Times asked in its Sunday editorial, then concluding that the basic problem is that the EU is not a true union but more a collection of states that have not in any real sense ceded decision-making power to a central authority.

The result, says the NYT "is chaos fed by conflicting national objectives", thereby itself contributing to the general miasma as legions of commentators fail to get to grips with what is going on.

There would be more sense in arguing that the problem is that the eurozone members have dismantled many of their own controls, while the central authority has not acquired sufficient replacement powers to govern in their stead. The EU is an unfinished project, and cannot yet fully occupy the ground vacated by national governments.

Moreover, we now find that the Central Council of the Bundesbank was well aware of this problem. According to Frankfurter Allgemeine Zeitung, it has just published a previously secret protocol from March 1998, expressing its fears about monetary union.

There is little here of interest but, crucially, with it is published a then confidential letter from Olaf Sievert, former president of the Central Bank of Saxony and Thuringia, to his colleagues in the Central Bank.

It, says FAZ gives new insights into the debate amongst federal bankers, especially as Silvert concluded that a eurozone of eleven might be manageable, presenting "no unacceptable risks". But he then goes on to acknowledge that political union was required to ensure the continued existence of the currency, while suggesting that this was opposed by the majority of central bankers.

One should not expect support for political union simply to facilitate monetary union with an independent central bank, Sieverts wrote. "Empowered state agencies are rivals of an independent central bank, not its patron".

That would seem to support the NYT thesis, except that the reality is a half-way-house – we have neither independent, fully functional state banks, nor a fully empowered European central bank.

That said, what emerges from the most detailed account yet seen of the negotiations which led up to the Cypriot "rescue", set out in Welt am Sonntag, was the pivotal role of the EU institutions.

When the troika of the European Commission, the IMF and European Central Bank (ECB) met during the first meeting, searching for solutions to the problems, Cypriot Finance Minister Sarris had no mandate to negotiate and the results were less than optimal from the point of view of the "colleagues".

However, during the second meeting, attended by Cypriot president Nicos Anastasiades, ECB President Mario Draghi and EU Council President Herman van Rompuy made the running, alongside Christine Lagarde of the IMF.

What is puzzling, though, is that by 10 pm in the second meeting, "interim results" of the talks with Anastasiades were announced, and there were plans for the Cypriots to submit a final written offer, then to go back to their hotel and meet again at seven in the morning. But, says WaS, "all of a sudden" there were signals of compromise. And by just after midnight the deal was done.

So far, we have no information as to what precisely made the Cypriots cave in, but it does not seem conceivable that the "colleagues" were wholly unaware of the level of corruption in the Cypriot banking and political systems.

Adding to the public disclosures already made, we learn that that a company controlled by former president George Vassiliou was given a loan of $5.8 million by the Laiki Bank, due for redemption in 2014, but the loan was written off a few weeks ago.

Perhaps even more relevant, we also learn that president Anastasiades himself is alleged to have transferred €21 million to England in the days leading up to the eurogroup meeting on 15 March. Thus, while his electors had their funds frozen and then seized, his fortune was safely out of the country.

Pushing hard for the hard-line solution, alongside the EU institutions, has been German finance minister Wolfgang Schäuble and, in an election year, the last thing the German government could be seen to be doing is bailing out a corrupt banking and political system. Any attempt would have been political suicide.

Thus, it is not unreasonable to assert that the corruption in the system had a material influence on the shape of the "rescue".

Even the Financial Times thus accepts that many Cypriots acknowledge that as a nation they bear responsibility for the banking crisis, although as many feel that the EU was unnecessarily harsh in imposing bailout terms. Nevertheless, it is also accepted that a number of Cypriot politicians will be doing jail time.

Additionally, there seems to be a sense of realism abroad, with the realisation that savers are nothing more than creditors of banks, and if the customer receives high interest, it is usually a risky bank. In the event of a bank failure, having creditors take the loss instead of the taxpayers is no bad thing.

Whatever the precise reasons, Cyprus is unexpectedly calm - for the moment. How long that calm will last is anyone's guess.